WEC Energy Group, Inc.

Good afternoon and welcome to WEC Energy Group's conference call for third quarter 2020 results. This call is being recorded for rebroadcast and all participants are in a listen-only mode at this time. Before the conference call begins, I remind you that all statements in the presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available approximately two hours after the conclusion of this call. And now, it's my pleasure to introduce Gail Klapa, Executive Chairman of WEC Energy Group.

Live from the heartland, good afternoon, everyone. Thank you for joining us today as we review our results for the third quarter of 2020. First, I'd like to introduce the members of our management team who are on the call with me today. We have Kevin Fletcher, our President and CEO, Scott Lauber, our Chief Operating Officer, Shao Liu, our Chief Financial Officer, and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. As you saw from our news release this morning, we reported third quarter 2020 earnings of 84 cents a share. Our solid results were driven by a rebound in economic activity in the region, warmer summer temperatures, and efficiency gains throughout our operations. Scott and Shaw will provide you with more details on the quarter in just a few minutes, and Kevin will cover our operational progress. But first, I'd like to discuss our new five-year capital plan. our roadmap for the next five years of capital investment. So for the period 2021 through 2025, we expect to invest $16.1 billion. It's the largest five-year capital plan in our history, an increase of $1.1 billion or 7.3% above our previous five-year plan. We're calling this roadmap our ESG Progress Plan because we're investing the $16.1 billion for efficiency, sustainability, and growth. As you would expect, our ESG progress plan includes a significant investment in renewables. We're allocating nearly $2 billion to regulated renewables that will serve our Wisconsin utility customers. In addition to the projects we have underway, we plan to bring 800 megawatts of solar, 100 megawatts of wind, and 600 megawatts of battery storage into our fleet. The data show that battery storage has now become a cost-effective option for us. Our plan also calls for modernizing our gas generation fleet. To improve efficiency, we expect to retire 400 megawatts of older natural gas fueled capacity. In addition, we plan to purchase 200 megawatts of capacity in the West Riverside Energy Center. That's a new combined cycle natural gas plant recently completed by Alliant Energy here in Wisconsin. And finally, on the natural gas generation front, we plan to build an additional 100 megawatts of capacity using reciprocating internal combustion engines, or as we call them, rice units. As we've already seen in the Upper Peninsula of Michigan, rice generation is flexible, reliable, and scalable. Now, all of these efforts should allow us to retire 1,400 megawatts of our coal generation by 2025. The benefits of our ESG progress plan are very clear. We'll cut CO2 emissions, maintain superior reliability, lower our operating costs, and grow our investment in the future of energy. Now, as you may recall, we've already set aggressive targets to reduce carbon dioxide emissions by 70% below 2005 levels by the year 2030. We're also working to make our generation fleet net carbon neutral by 2050. With the plan, ladies and gentlemen, that we just described to you, we're able to announce today a new near-term CO2 reduction target. We're aiming to lower emissions by 55% below 2005 levels in just the next five years by the end of 2025. In addition, for the longer term, this generation plan will deliver significant economic benefits for our customers. Compared to the status quo, We expect customer savings of approximately $1 billion over the next 20 years. There are a number of other important elements in our ESG progress plan, and we'll be happy to share all the details with you at the upcoming EEI conference. But in summary, our updated capital plan should grow our asset base by 7% annually over the five-year period with no need for additional equity. And the plan fully supports our projection of long-term earnings growth at a rate of 5 to 7% a year. Now let's turn for a moment to the economy and a quick look at conditions here in Wisconsin. As you know, we provide energy to a broad range of industrial and commercial customers. Many of them produce and deliver essential services. During the pandemic, we've seen particular strength in paper, food processing, packaging, plastics manufacturing, and electronic controls. and there's clearly been a strong rebound in the labor market over the past few months. The latest available data show Wisconsin's unemployment rate down to 5.4%, and of course that's well below the national average. I would add that new developments are creating even more opportunity, particularly in the southeastern corridor of the state. For example, Kamatsu recently broke ground on a state-of-the-art manufacturing and global mining campus serving as its Milwaukee area headquarters. Our company sold 43 acres of land to Komatsu for this development, which is taking place in what's known as Milwaukee's Harbor District. Komatsu expects to invest approximately $285 million in the project. When complete, it will include engineering and robotics labs, a large office complex, a customer center, a modern manufacturing facility, and more with the potential to employ more than 1,000 people. Construction of the campus is expected to be complete in 2022. And literally just a few days ago, Amazon opened a 2.5 million square foot distribution center in Oak Creek. That's just south of Milwaukee. This four-story center is equipped with the latest in robotics for packing and shipping. And at full strength, Amazon expects to employ 1,500 full-time workers at its facilities. And of course, I know all of you are interested in the Foxconn development in Racine County. As we speak, construction work continues on a smart manufacturing facility and a network operations center that will support high-performance computing. Groundbreaking on the high-tech campus took place just a little more than two years ago. Since that time, Foxconn's plans have clearly evolved. The company is now assessing a much more diverse product line than originally envisioned. Now, because of these changes, The state of Wisconsin is asking to revise its tax incentive contract with Foxconn, and the head of the state's economic development agency has said the door is wide open to support Foxconn's business expansion in the state. So all things considered, with a resilient economy and major developments in the pipeline, we remain optimistic about our long-term sales growth. And with that, we'll turn it over to Scott, and he will chat about our sales for the third quarter of this year. Scott, all yours.

Thank you, Gail. We continue to see customer growth across our system. At the end of the third quarter, our utilities were serving approximately 11,000 more electric and 32,000 more natural gas customers compared to a year ago. Retail electric and natural gas sales volume are showing on a comparative basis on page 17 and 18 of the earnings package. As you recall, we adjusted our forecast at the start of the pandemic. The results in the third quarter were better than our adjusted forecast across all customer classes. For example, residential sales of electricity were up 7.1% from the third quarter of 2019, and on a weather-normal basis, were up 4.2%. That's a 1.6% better than our forecast. Small commercial and industrial electric sales were down 2.5% since the last year's third quarter. And on a weather normal basis, we're down 3.3%. This was six-tenths of 1% better than our forecast. Meanwhile, large commercial and industrial sales, excluding the iron ore one, were down 5.4% from the third quarter of 2019 on both an actual and weather normal basis. This reflects a rebound in economic activity in Wisconsin and was 4.3% better than our forecast. Overall, retail deliveries of electricity were down by three-tenths of 1% from the third quarter of 2019. And on a weather-normal basis, we're down 1.5%, tracking well ahead of our forecast. And looking at the sales trend on page 17 of the packet, we continue to see favorable progression towards normal demand in the third quarter. In fact, we're very pleased with the preliminary sales results we've seen for October. Of course, we're watching economic indicators, as always, and we are prepared to respond if the level of recovery drops back to what we saw earlier this year. I also have a few updates on the wind projects in our infrastructure segment. Construction on the Blooming Grove and Tatanka Ridge projects is on schedule. Blooming Grove should be completed by the end of this year. For Tatanka Ridge, we expect commercial operation in the first quarter of 2021. And turning to another of our projects, construction on the Thunderhead Wind Energy Center in Nebraska is nearly complete. However, as we reported last quarter, there will be a delay in the in-service date. This delay has been caused by a permit issue related to a substation being built by Nebraska Public Power District. We are working with all parties to complete the work and bring Thunderhead to commercial operation in the latter half of 2021. I would point out that we have a number of upsides in the plan. So this delay should not change the trajectory of our earnings growth for 2021. And now I'll turn things over to Kevin to give an update on utility operations.

Thank you, Scott. I'll start with the fact that we have maintained our focus on safety and customer service. In fact, our customer satisfaction scores remain at an all-time record high. Meanwhile, we have streamlined our operations and maintenance costs through a number of efficiency measures, and I'm confident that the momentum we've seen this year will continue. Now I'll review where we stand in our state jurisdictions. In Wisconsin, I'm pleased to report that just yesterday our Two Creek Soda Farm began commercial operations. providing 100 megawatts of renewable capacity for the customers of Wisconsin Public Service ahead of schedule and on budget. This is our first utility-scale solar project with an investment of $130 million. And we continue to develop plans for two liquefied natural gas facilities. We are working with regulators and local officials, and pending all necessary approvals, we expect construction to start in the fall of 2021. These facilities will provide customer savings and enhance reliability during Wisconsin's cold winters. In Illinois, we're seeking a rate review for one of our smaller subsidiaries, North Shore Gas, which serves approximately 160,000 customers in the northern suburbs of Chicago. Rates for North Shore Gas were last set more than five years ago before we acquired the company. Since then, we have consistently invested capital to serve our customers while reducing operating costs. We expect a constructive dialogue with the Illinois Commerce Commission as we seek rates that will support system safety and reliability. And with that, I'll turn it over to Shaw.

Thank you, Kevin. As Gil noted earlier, our 2020 third quarter earnings moved to $0.84 per share compared to $0.74 per share in 2019. To reiterate Scott's comments, COVID-19 had a much milder impact on electric sales. Overall, we estimate that the pandemic caused a one-cent decrease in margin for the quarter. This decrease was more than offset by favorable third quarter results, largely driven by our continued focus on operating efficiency, rate adjustment at our Wisconsin utilities, and the execution of our capital plan. Our electric utilities also benefited from warmer than normal weather. The earnings package placed on our website this morning includes a comparison of third quarter results on page 31. I'll walk through the significant drivers impacting our earnings per share. Starting with our utility operations, this quarter we outperformed third quarter last year by 11 cents. Our focus on operating efficiency drove a 4 cent decrease in day-to-day O&M expenses. we benefited by an estimated $0.03 per share from warmer weather. And all other factors had a positive variance of $0.07, primarily driven by rate adjustments, continued recovery from capital investment, and fuel. These favorable factors were offset by $0.03 of higher depreciation and amortization expense. Our energy infrastructure segment also was accretive to the quarter. The Coyote Ridge Wind Farm, which was placed in service in late December 2019, added $0.01 per share, primarily from production tax credit. Finally, the $0.02 drag in corporate and other was driven by some tax and other items partially offset by lower interest expense and improved rabbi trust performance. Remember, rabbi trust performance is mostly offset in Utility O&M. In summary, we improved on our third quarter 2019 performance by 10 cents. Now I'd like to update you on some other financial items. For the full year, we expect our effective income tax rate to be between 16 and 17%. Excluding the benefit of unprotected taxes flowing to customers, we project our 2020 effective tax rate to be between 20% and 21%. At this time, we expect to be a modest taxpayer in 2020. Our projections show that we will be able to efficiently utilize our tax position with our current capital plan. Looking now at the cash flow statement on page 6 of the earnings package. Net cash provided by operating activities increased $109 million. This increase was driven by higher cash earnings, partially offset by higher working capital requirements, including COVID-related impacts. Total capital expenditures were $1.6 billion for the first nine months of 2020, a $107 million increase from 2019. This reflects our investment focus in our regulated utilities. Last month, we refinanced $950 million of our holding company debt, reducing the average coupon of these notes from 3.3% to 1.6%. We will recognize the $0.06 make-all premium in the fourth quarter, which we have already factored into our 2020 annual guidance. In closing, I'd like to provide our updated guidance. We're narrowing and raising our earnings guidance for 2020 to a range of $3.74 to $3.76 per share, with an expectation of reaching the top end of the range. This assumes normal weather for the remainder of the year. Our previous guidance was in the range of $3.71 to $3.75 per share. With that, I'll turn it back to Gail.

Shaw, thank you very much. We're on track for a solid year. Again, in light of our strong performance, our guidance range, as Shaw indicated, now stands at $3.74 to $3.76 per share, with a clear expectation of reaching the top end of the range. We're also reaffirming our projection of long-term earnings growth in the range of 5% to 7% a year. And finally, a quick reminder about our dividend. As usual, I expect our board will assess our dividend plans for next year at our scheduled meeting in early December. We continue to target a payout ratio of 65 to 70% of earnings. We're right in the middle of that range now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share. And operator, we're now ready to open it up for the question and answer portion of the call.

Thank you. Now we will take your questions. The question and answer session will be conducted electronically. To ask a question, please press the star key followed by the digit one on your phone. If you are using a speakerphone, turn off your mute function to allow your signal to reach our equipment. We will take as many questions as time permits. Once again, press star and then one on your phone to ask a question. Your first question comes from Shar Pureza with Guggenheim Partners. Your line is open.

Hey, Char, how are you doing today?

Oh, not too bad, Gail. How are you?

We're good. Are you still in your unidentified bunker in Jersey?

Yes, I'm ready to break out, to be honest with you, bud. Still there, still there. Still there, all right. Everyone's healthy.

We're good here. Thank you, Char.

Excellent, excellent. So a couple questions here. First, obviously, another healthy CapEx increase as we're heading into EEI. The generation spend can be a little bit more lumpy versus, you know, traditional renewables. So how do we sort of think about the cadence of that spend through 25? Is it ratable? Is the 7% rate-based growth linear? I mean, just remind us, you know, what drives sort of that delta between rate-based growth and earnings growth, especially since you aren't issuing equity, right, that was clear? Or, you know, are you simply, Gail, implying that unless something is unforeseen, earnings growth should be close to the top end, marrying 7% rate-based growth. So how do we certainly think about that?

Okay, terrific. Let me handle the second part of your question first, and then we'll let Scott and Shaw talk about the generation portion of the capital spend and how it shakes out in our projections over the five-year period. But in terms of your basic question about how does 7% asset-based growth translate into earnings growth, particularly since we don't need to issue equity. And that, I think, as you know, is a differentiating factor for us. But obviously, I mean, to be accurate, as you know, you have to take into account the fact that we will be issuing some debt to help finance the capital program. So in essence, when you look at 7% asset-based growth and you throw in some assumptions on financing costs for debt, And remember, we're basically trying to finance our growth at 50% debt, 50% equity roughly. In essence, that takes the 7% down a bit. And I would say that conservatively, this plan should put us certainly in the low sixes, but certainly in the top half of that, well into the top half of that 5% to 7% growth projection. I hope that responds to your question, Char.

It does. It does. And I appreciate that.

All right. And Scott and Shaw, on the generation spending over the five years.

And there will be more color in the deck that we provide this Friday than for EEI. But as you look at the five-year plan, you know, it's spread, you know, probably more over the first four years with probably 22 and 23 being the larger years on capital spending. But once again, we're early. You know, we have to go through the regulatory approval, and it will affect the timing of this. But the typical five-year plan that you've seen that you'll see later, you know, the first three, four years or two or three years are much more, you know, analyzed, a little more detailed to it, where the four and five years that usually tail off a little bit because we're not quite that far in laying out all those projects. So 2023 and 22 are probably the bigger years. Got it. Thank you. Thank you for that, Scott.

And, Charlie, just to add another piece of color to that, We're expecting, and in our plan, we're expecting some unit retirements in 2023 and 2024. And in order to prepare for those unit retirements, we'd have to be spending capital on replacement capacity up front. So I think Scott and Tara are right. You would expect to see the lion's share, I would think, of our generation capital spend 2022, 2023, 2024, and perhaps a bit over into 2025.

Right, right. That's helpful. And then like, you know, Gail, just as you kind of look at the generation transition, look at what you're proposing today, it's like 1.8 gigawatts of fossil fuel assets that are retiring, focusing on solar, batteries, wind. I mean, obviously, this is going to afford some additional O&M and cost savings, maybe some of the best we've seen in the industry. How do we sort of think about the size of the O&M profile and the trajectory of as we think about 21 and sort of beyond there, as we're looking to sort of model the rate inflation or even the O&M profile that you guys have. Because it just seems like this is going to lead to additional bill headroom for additional capital opportunities.

Yeah, Sean, I don't think there's any question about that. Because, yes, as we retire some of these older, less efficient units, There is significant O&M involved in maintaining those units. There's also avoided capital. There's a significant amount of avoided capital here that would have to be spent on the older inefficient units if we kept them running. To give you an example, and we've all talked a good bit about this, as you can imagine, in terms of what we really think is real in terms of the continuing decline in operation and maintenance costs while maintaining really superior customer service. But say, for example, a four-unit coal-fired plant that is an older plant, we're seeing probably net $50 million of O&M savings on the retirement of a plant like that, for example. So clearly there are coal retirements, as I mentioned. during the script involved here, but it's multi-million dollars of O&M savings, not to mention additional fuel cost savings. So, yeah, there's going to be headroom here, and we don't see this plan driving rate increases at all above the inflation rate. And in the longer term, as I mentioned, compared to the status quo, I would expect you know, at least a billion dollars of savings compared to the status quo over about a 20 year period. But in the near term, there'll be some little uptick that we'll have to ask for to take care of the recovery of the capital. But there'll be huge O&M offsets and fuel cost saving offsets for customers. So very little bill pressure. And then in terms of just where we are at this stage of the game, Kevin, we really think like, as we look at and finish our budgets for 2021, that the O&M savings trajectory we're on will continue.

That's exactly right, Gail. As I mentioned, the momentum that we've seen so far, we have full expectations it will continue going forward. Perfect.

And then just lastly for me, Gail, obviously we saw what Foxconn's move last week to challenge WDC's determination on its tax credits and the scope change. How do you sort of see this process kind of playing out, and how should we sort of as observers on the sidelines kind of think about it? Is it just part of the process, given the design has changed a little? Do you still envision incremental opportunities with the project? How do we sort of put all this sort of stuff together sitting on the sidelines?

Yeah, great question, Char. And I would give you a three-part answer. The first is, you've heard me say this before, forget about what you read in the headlines. Look at what's happening on the campus. Look at the construction activity going on on the high-tech campus that they're now two years into developing. Foxconn has invested over a half a billion dollars already in this campus. As I mentioned, construction continues. They've already become the largest single property taxpayer in the county, in Racine County. And I do think what will happen here, because the contract with the state was so specific about building a Gen 10-5 fabrication plan for LCD panels, I do think there will have to be some changes to the contract, which there are ongoing discussions about. But again, I would say to you, look at what's happening on the campus. And I would add that because their plans have changed and their original plan did not have high capacity computing, we're still seeing significant projection of demand for electricity. So our demand projections have not changed dramatically at all because as they've changed and evolved their plans, they've added things like high capacity computing. And then the last thing I would say to you is one of the products that they're looking at developing and producing out of that campus are server parts and server racks. And they're already deploying a combination of technologies that I just really got a briefing on yesterday from them, which was just really amazing. They're already deploying on a test basis there at that campus, artificial intelligence, 5G and robotics to be the most efficient producer of server and server racks in the world out of that campus. So they're still very active in terms of determining what they want to do there. I do think it will probably require some modifications to the wording of the contract, But, again, I would say keep your eye on what's happening on the campus, and we'll be happy to keep you updated.

Perfect. Thank you, guys. And, Gail, congrats on your extension as chairman. Now you're stuck with us until 24. Thank you. Thank you, sir. Happy to be stuck. All right.

See you guys. Take care.

Your next question comes from Julian DeMoulin-Smith with Bank of America. Your line is open.

Greetings, Julian, and where are you today? Traveling the U.S., voting several times, I assume.

Always, every time. And let me reemphasize Char's comment. We're pleased to be able to continue to report to you what we're doing over the next few years, too. So look forward to that. Thank you. Absolutely. So if I can pick it up where you left it off as well, let's talk about the timing on the energy infrastructure just more broadly as well. And I know you guys talked about the generation piece here, but you all were so successful in this first year in pulling forward that CAP Act, you know, as you identified opportunities, et cetera. What's the potential here that we do that again, especially as it seems like the energy infrastructure opportunities before you are probably going larger now than they were before. So I don't want to get too far ahead of myself here, but curious how you respond to that.

Yeah, well, first of all, I think your observation is correct. When you look at the pipeline of high-quality opportunities that we are seeing, that pipeline, even though we have been very successful in pulling forward, as you say, a significant amount of investment in the infrastructure segment, that pipeline of opportunity is definitely broader and greater and deeper today than than it was before the pandemic. So we are, as you know, we're being very selective here because we're in a very strong competitive position with our tax appetite and with the fact that we can bring these to closure without having to issue equity, without having to go through a lot of hoops. So we're being very selective and we're focusing right now on three or four near-term projects, I wouldn't expect any new announcement before the end of the year. But I would just say watch this space for 2021.

Got it. Excellent. And then if I can turn back to 21 in the context of earnings and earnings latitude, not necessarily on the longer-term 5 to 7, but just as you think about the O&M that you were able to pull – The latitude in your numbers, perhaps, I'll frame it that way. How do you think about the ability to accelerate, especially in the 4Q here, some of the costs from next year and add confidence to your numbers going into next year? I'll put it that way. Especially given some of the refinancing opportunities you all have as well.

Yeah, great question, Julian. Let me say this. We have a significant number of maintenance projects underway now in the fourth quarter. we had identified, as you may recall, in addition to our original plan, which had about a 2% to 3% reduction in O&M for this year, in addition to that, we had identified up to about $80 million of additional cost reductions if needed. The good news is, with what you've heard in terms of a number of the positive developments, we will not need that deep a cost reduction. And in addition to that, Sean, the finance team did a great job, as you mentioned, on the refinancing. So that's another plus. So there's a lot of work going on right now in terms of the kinds of outage maintenance projects and other O&M projects that I think will be helpful in de-risking 2021. Sean, anything to add to that?

No, I think you covered it, Gail. Thank you.

Awesome, guys. I'll pass it over. I'm sorry, go.

Nope. Thank you, Julian. Anything else on your mind?

We are good. Excellent. Best of luck.

Thank you. Thank you very much.

Again, it is star one on your telephone keypad to ask a question. Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.

Greetings, Michael.

Hey, guys. Hey, considering that you're going to be a taxpayer in 2020, or modest taxpayer in 2020. Yeah, should, depending on the outcome of the election, there's talk of possible higher tax rates going forward. If there were higher tax rates, would that increase your ability to grow the infrastructure business faster, deeper, have it be a higher percentage of overall earnings than your original plan? Just curious how that might affect things.

Good question. Let me try to frame the answer, and we're going to ask Sean Scott to add whatever they would like on that question. For starters, we are always modest, as you know. So we'll be a modest taxpayer in 2020. But with the way the current tax rules work on investment tax credits and production tax credits, we're always going to be, no matter what the effective tax rate is, we're always going to be, in our projections, a modest taxpayer, simply because you can't take, under the rules, you really can't take it to zero. So that's one point. And then if tax rates go up, there's actually a couple of benefits to us overall. Sean?

Yeah, I think, one, to your point, Michael, that if tax rates went down, up, then we would potentially have a higher tax appetite. So therefore, we could potentially speed up the infrastructure investment. And on top of that, you all knew that there's interest tax shield at the holding company. So with a higher tax rate, that would basically provide some benefits at the holding company. And obviously, we would need to work with the regulators in each jurisdiction on the recovery front. But if we're able to recover the higher tax rates, then we would have better cash flow and credit metrics. And we have pass-through mechanisms in all of the jurisdictions. So I think overall we are prepared in case of a different tax situation.

And, Michael, just out of curiosity, how are you going to avoid higher taxes? I don't think that works for you, does it?

Modesty is the best policy.

I would reiterate, though, that regardless of the tax rates, we are going to look at the infrastructure segment long-term not being more than 10% of our total earnings. So I just want to reiterate that with you.

Hey, just one more question and I'll let you go. There's talk also of extending or giving new tax credits to batteries going forward. Is that an area that you think you might be able to invest in going forward? Presumably it's an ITC rather than a PTC.

I'm just curious about how that might affect your thought process. I would guess it would almost have to be an ITC as opposed to a PTC. But, yes, you probably heard me say that for the first time, in this new five-year capital plan that we're rolling out today. For the first time, we're adding battery storage for our regulated business. The economics are such now that with the amount of battery storage that we think we need, it will fill a very economic function for us with or without additional tax credits. But long story short, regardless who wins the presidency, it wouldn't surprise me if there was some modification to all of the tax credits associated with renewables. And you can see a big push for tax credits for batteries. We have not counted on that in our five-year capital plan, but just the economics and the niche need that we have for batteries, particularly at peak times, it's beginning to make, and for the first time, it's making significant economic sense for our customers.

Do you think there'd be a role for batteries with the wind projects and the infrastructure business, though?

Oh, potentially, yes. Absolutely. Absolutely. And we have room at the number of the wind farms and our infrastructure projects. We have room for battery storage. So, yeah, that potentially could be an enhancement down the road, no question. Great. Interesting.

All right. Have a great day.

Take care.

Thanks. Thank you.

Your next question comes from Jeremy Tonnet with J.P. Morgan. Your line is open.

Good afternoon, Jeremy. How's everything, Jeremy?

Very good. Thanks for having me.

It's been nice being here.

I was just wondering if you might be able to update us a bit on the local and economic sales trends across your service territory that you said were kind of underpinning favorable October trends, as you mentioned there, and Also curious on expectations for the winter heating season under ongoing kind of COVID-19 impacts here, and how do you think the impacts differ on the electric versus the gas operations there?

That's a great question in terms of how the impacts differ between the electric and natural gas distribution business. And we have actually had a lot of internal discussion about that. First of all, let me say this. Just to give you kind of a framing answer related to the electric side and the trends we're seeing. As I mentioned to you, residential consumption of electricity has exceeded what we thought during the pandemic. Now, some of that was weather driven. We had a warm summer compared to normal. But some of it also is just the fact that, you know, working from home and schooling from home in many cases, is just driving more energy consumption from residential customers. So the residential demand for electricity during the last few months, whether or not, has actually exceeded our expectations. That's been on the plus side. We've done better than we thought we would in terms of industrial demand for electricity, still down, but we've done better than we thought we would. As I mentioned during the script, We have a number of industrial customers that produce essential products, and certainly paper, food packaging, food processing, electronic controls, plastics manufacturing. We've all seen strength among our customers in those segments. Where we continue to see a drag, and it won't surprise you, is in small commercial and industrial. Many restaurants are still at 25% capacity, just to give you an example. You know, hair salons are having to operate at much lower levels. You know, some university campuses are not back in terms of full complement of students. So the dorms are not full. So on the commercial side, particularly for small business, there's still a struggle going on. So that would be kind of my answer, and Scott and Chuck can have whatever they would like, and Kevin as well. In terms of the difference between electric and gas, it's going to be interesting to see, but we had a relatively cold October for October temperatures in Wisconsin, for that matter, in the upper Midwest. And actually, even weather normalized, natural gas demand was better than we thought it would be, exceeded our projections. The other thing I can tell you that is, I think, significant, and Scott can add to this, we're seeing very, very good customer growth on the natural gas distribution side of the business. Scott?

That's correct, Gail. Especially when you look at Wisconsin and the growth we're talking about on the industrial side and the economic development you're talking, we're seeing good natural gas growth and electric growth. Gas growth, it's nearly 5% of new customers. 5% more new customer hookups this year than we had over last year. So good customer growth, and that number is like 3% or 4% on the electric side. So really positive as we're seeing new connections come along. And you're right, going into the winter months, but October, our preliminary view looks reasonable and very happy with what we're seeing.

Does that respond to your question at all, Jeremy?

Yeah, that was very helpful. Thank you for that. And then just wanted to go back to the O&M side, I guess, and how has O&M savings trended versus expectations and what you see extending into 2021 here? And really just want to see, are these savings meaningful enough to potentially defer your next Wisconsin rate case in any sense on commission appetite there?

Well, Jeremy, let me say first on the rate case front, way too early to have any meaningful discussions about a potential filing in 2021 in Wisconsin. And I would just simply say this, every option is on the table right now. We'll have a whole lot better feel as we move into the first part of next year, but every option is on the table right now. And then in terms of the O&M reductions, essentially, I'm guessing that we end up, Shaw, about 3% to 4% O&M lower for this calendar year than last calendar year. Shaw is shaking your head up and down, yes. Now, we had identified potentially more O&M savings than that. But as we've had a number of positive developments, bottom line is we simply don't need to cut that deep. But Kevin, everything I'm seeing, I know you're closer to it than I am on the operational side, but everything I'm seeing is that our momentum on O&M reduction will continue into next year, and a big chunk of the savings that we're seeing are sustainable.

That's exactly right, Gail. If you look at things that we've learned during the COVID pandemic that we're all dealing with is we've been more effective in our field operation and scheduling. We're also completing our customer service platform that will be for WeEnergies here the 1st of January, and that will have a consistent platform available for all of our companies, and that will also give us some sustainability in our cost savings as well.

And then, of course, we have in the future plan, as you know, we've got retirements of older, less efficient generating units, which also will deliver O&M savings. So we're very bullish and optimistic on our ability to continue to drive efficiency and best practice across our seven operating companies.

Got it. That's very helpful. Thank you for that.

You're more than welcome. You take care.

You too. Thanks.

Your next question comes from Sophie Karp with KeyBank. Your line is open.

Hello, Sophie. How are you today?

Hi.

I'm doing great. Thank you. Good afternoon. How are you?

In the great state of Ohio, right? In Cleveland. Are you hanging in Cleveland?

No, no. I'm in Utah, anchoring down in the mountains.

Oh, wow. Good for you.

All right. Okay. So a question for you guys. On batteries, you mentioned that batteries are becoming a cost-effective solution for you. Could you maybe put it in relative terms? Cost-effective relative to what? And I'm assuming they replace in peakers of some sort. Maybe if you could give us a little bit more color on how you're deploying those assets and what you're comparing them to.

I'd be happy to. And the answer is really very straightforward. It's cost-effective compared to other peaking solutions, if you will, compared to other capacity that we would need to help meet peak demand. Or as someone said during one of our meetings the other day, the battery solution basically is going to give us sunshine after sunset, which I thought was an interesting comparison. But yes, when you compare it to other peaking technology, other peaking capacity, a certain amount of battery storage has become cost-effective for our customers.

So that is before any potential tax incentives are attached to it.

That would be before any additional tax incentives. That is correct. We're not counting on any additional tax incentives at all.

But if they're available, we will definitely take advantage of them.

Oh, absolutely. Yep. Scott's right.

Got it. And the storage solutions, are you looking beyond battery storage? Are you looking at any other, I guess, stationary power solutions, stationary solutions, maybe, you know, other types of chemistries, other technologies that are not batteries, or is it primarily just lithium ion batteries at this point?

At this point, it remains lithium ion batteries. Now, that doesn't mean we're blind to something else, but the plan, because it's proven, and we understand the cost and the effectiveness of the technology, the plan right now calls for lithium ion batteries. If two years from now, Two years into our five-year plan, if something else emerges that we know is cost-effective and reliable, then we would certainly be open to it. But right now, it's lithium-ion. And let me add to that just a philosophical comment. A company like ours, I don't believe in our whole management team feels the same way. I mean, we're not in the business of being on the bleeding edge of technology. I mean, this, you know, to deliver customer value and shareholder value, this is all about cost effectiveness and reliability. And that's our job, cost effectiveness, reliability, customer satisfaction. All of that leads to shareholder returns. So we're, you know, we are a very close follower. And Kevin is on the board of the Electric Power Research Institute. I was years ago. We participate in a number of the experimental projects. We stay abreast of technology developments, but for our customers and for what we believe is the core of how we do business, we're not into the bleeding edge of technology.

Thank you. This is all from me. Appreciate the answer.

Oh, you're more than welcome. Take care, Sophie.

Our next question comes from Michael Sullivan with Wolf Research. Your line is open.

Hi, Michael.

How's it going today? Hey.

Hey, everyone. I'm doing well, Gail. Happy you're sticking around. Hopefully we could get a couple of bucks titles during the next four years, right?

We certainly hope so. And, you know, I've had to take a lower pay because we have to get more to Giannis, I think. We'll see. We'll talk about that.

All right. Sounds good. Hey, I just had a question on the coal and gas that you're shutting down, the 1,400 and 400 megawatts. Are you able to quantify the remaining rate base value of that and how that's planning to be recouped?

Absolutely. So if you think about, and again, those retirements will occur probably most of them 2023, 2024. So if you look at our projected rate base for 2025, it's roughly across our entire operation, our entire system, it would be roughly about $32 billion. If you look at essentially what we will be retiring, the remaining rate base is probably roughly, Shaw, $600 million out of deferred taxes. So a way to look at that is it's about 2% of our total asset base, or will be about 2% of our total asset base, and for Wisconsin, under 5% of our rate base. So that's really kind of the basic numbers as we see them today. And in terms of future recovery, I think we've done very well in terms of coming to an agreed upon solution with the commission, with the environmental advocates, with the industrial customer groups. We've got a good track record of coming to an amiable and constructive solution in terms of recovery. also potentially in terms of some securitization, particularly of environmental control costs. So there'll be a lot of discussions over the next four years. But in direct answer to your question, less than 5% of the Wisconsin rate base by 2025 and roughly about 2% of our total asset base.

Great. That's super helpful. And then my second question was just you mentioned in the remarks about filing a – North Shore gas case in Illinois, any near-term plans to do the same for people's gas?

Short answer, no.

Simple enough. Okay. Thanks a lot. Appreciate it.

You're welcome. Thank you.

Your last question comes from Paul Patterson with Glenrock. Your line is open.

Greetings, Paul.

Hey, greetings. So, Just sort of, I know it's a little far off, but when COVID is over, are you seeing any, I mean, what are your thoughts about what you think demand growth or sort of the economic activity that's occurring that you're seeing? Are you seeing any potential changes in usage patterns happening after COVID? more telecommuting, changes in peak, anything like that that you're potentially thinking are going to be more long-lasting than once the pandemic is kind of over?

Well, that's a good question, Paul. And everybody's crystal ball is a bit fuzzy after what we've all been through in 2020. However, a couple thoughts for what they're worth. I think We've all seen how telecommuting, working from home, working remotely can lead to positive results. And I think most all major corporations, ours included, are going to need less office space. I think some amount of remote working will be a permanent part of the American landscape and the corporate landscape for many, many years to come. So the question then becomes, well, how much remote working will remain after COVID is finally conquered? And what does that mean in terms of commercial energy usage and also in terms of continuing growth in residential energy usage? And those questions are still to be answered. But I think to me, manufacturing, particularly with as hot an area as we have, manufacturing and distribution in the southeastern corner of Wisconsin Uh, you know, some of these projects may move a few months here there, but. But, as I mentioned in the prepared remarks, you know, this is a hot area for industrial and commercial growth right now. We don't see that diminishing. So, then the question becomes, do things shift around a bit between commercial and residential. Depending upon how much work at home activity there continues to be post post the vaccine. Kevin, any other thoughts again?

That's that's certainly true for the. broader group look at our economy, because you just look again at what we've seen as a result of it. You mentioned about facilities. We're seeing that because of the positive results and meeting the needs of our customers, we don't need as much in the way of facilities as we've had in our major markets. So as you pointed out, I think looking broadly, other industries will be like us in that perspective. But I would also agree, it's truly too early to tell to see how we bounce back and how quickly we bounce back.

Okay, great. So on that note, you know, you guys have a large amount of industrial activity that you guys have gone over, and you've got also, you know, things have changed over the years. You've got a large amount of geographical diversity and what have you. And you mentioned Foxconn, and there's, you know, as you know, in the media sort of a saga about this. You know, and I know you're very supportive of Foxconn, and you see it as a big win and what have you, but let's just, you know, for argument's sake, say that, you know, for whatever reason, Foxconn and the state can't come to an agreement. You know, given everything that you've got going for you, you know, with the dynamic growth right around you, but also just your geographic diversity, the size of the company now, what kind of impact would that have if it actually just didn't happen? Do you follow what I'm saying?

Yeah. Well, Let me say, first of all, I mean, Foxconn is a huge corporation. I think from a revenue standpoint, they're the fourth largest tech company in the world. But even a company that size, I mean, they've already invested a half a billion dollars, more than $500 billion in beginning to build out the campus that we've talked about in Racine County. So even a company that size, I don't think would just walk away from a half a billion dollar investment that they just made in very modern state of the art production equipment. So to take that a step further, if they did nothing more, they would still have a half a billion dollars of investment. They would still have significant electric demand because they've added high capacity computing to their plans. In fact, that's already being built right now. And we've already seen $1.3 billion of additional private investment that has nothing to do with Foxconn directly, but $1.3 billion of additional private investment, two-thirds of which is either complete or underway in the 10-mile radius around the Foxconn campus. So there's already been, from a textbook economic development standpoint, Paul, there's already been tremendous ripple effect, and the state has benefited from that. To put that in perspective, if there was no more investment from Foxconn at $500 million, which they've already done, it would still be the largest economic development project in the history of the state of Wisconsin. Then we have Haribo, which we've talked about a lot, the gummy bear people. They are breaking ground next month. And their investment is going to be, gosh, probably 30% to 35% more than they originally envisioned. It's going to be a much bigger campus. So we're seeing such tremendous opportunity and tremendous pipeline of growth that I'm not overly concerned about what might happen. And also, I mean, there's good faith on both sides here. So I mean, I just don't see despite all the political rhetoric that you see, again, my advice is forget the headlines. Look at what's going on on the ground.

Okay, great. I guess we could take that further than maybe Wisconsin. Thanks so much. I appreciate it.

You're more than welcome, Paul. All right. I think that wraps us up, folks. That concludes our conference call for today. Thanks again for participating. Always a joy to be with you. If you have any other questions, please feel free to contact Beth Straka. She can be reached at 414-221-4639. Thanks, everybody. Stay safe and have a good election day.